geothermal power plant projects in central america - Orkustofnun

MarketIn this study, the average price of 115 USD/MWh for the year 2010 was assumed for the wholesalemarket in Central American countries with an expected growth rate of 5%. Electricity market researchis described in Section 2.2.8.Capital costThe geothermal development capital cost includes exploration and confirmation, drilling and powerplant. Capital cost is calculated as described in Chapter 5.Operation and maintenance costO&M cost is assumed as 2.8 UScents/kWh with an expected growth rate of 4 %. The cost of O&M fora power plant and for a steam field is described in Section 5.5.Structure of geothermal financingThe literature review (Battocletti, 1999; Hance, 2005; Rodríguez and Henríquez, 2007; Long, 2009;Salmon et al., 2011) illustrates values between 15% and 50% for the equity component in financinggeothermal development. Lenders will normally require an equity percentage to ensure the sponsor’scontinued commitment. For the exploration phase of the project, it is frequently used as the developerrisks his own money on an indirect assessment of resource potential. Based on a survey of theliterature, this analysis assumes 30% equity.Discount ratesElíasson and Valdimarsson (2005) argued that the interest rate required from a geothermal projectinvestment, often referred to as MARR, is defined by the company in order to undertake a project. It issimilar to WACC if the project bears in itself the same or similar risk as the average risk from thenormal operation of the company. The MARR can be in the range of 5-25% depending on the risk ofthe project. Ormat, a leading player in the geothermal market uses 12-18% as their target for a feasibleproject in developing countries (as cited in Broniki, 2004). According to Gordon (2009) risk capitalcomes at a high cost, and most investors require a 20% return on investment, depending on the projectand perceived risk.In the Central American region, J. A. Rodríguez explained that the MARR for an investor in thegeothermal development has increased in the last couple of years, in response to the jurisdiction andpersonal insecurities of these countries. The minimum IRR used to be 10% or 11% but is now 15%or 16%. The ROE (or equity IRR) that is normal requested is usually around 20% (personalcommunication, November 14, 2011). In Honduras, the second largest country of Central America,according to C.A. Lagos, from the point of view of private geothermal developers, the commonly usedvalue (like MARR) for a project is between 10% to 14% and the MARR for equity is between 12% to18%, both considering a period of 20 years (personal communication, November 11, 2011).The Central American region’s values are in contrast with that of other developing countries such asIndonesia and Kenya. An Indonesia project appraisal document from World Bank (2008) pointed outthat various reports and discussions with investors indicated that the capital cost for a geothermalIndependent Power Producer is somewhere between 14 to 16%. In Kenya, the Government requires aROE of 15%, while private investors would normally ask between 18% and 23% but it is not unusualto get higher requests (Ngugi, 2012). These figures vary with respect to the data from developedcountries such as Iceland. According to B. M. Júlíusson, the minimum WACC that is used forgeothermal projects in Iceland is 8% and the minimum rate of return on equity is 12%. The expectedrate of return on equity for Landsvirkjun on new projects is 12 - 15% (personal communication,November 11, 2011).Hance (2005) has drawn attention to the fact that in case of project failure, the geothermal equityholders are the last to recover their investment, therefore, to recompense risk they expect high rates ofreturn from 16 to 20%. Based on the above information, 16% is used as the MARR for projects and20% is used as the MARR for equity.46